1. Technical Field
The present invention relates generally to data transfer and more particularly to the interchange of specific information and documentation for activities such as brokerage account transactions verification.
2. Background Art
Financial Broker/Dealers are part of a highly regulated, high profile, situation-driven business. Specifically, each transaction completed by a Broker/Dealer is subject to a myriad of federal regulations and government oversight. These rules include those such as “Regulation T” (12 C.F.R. § 220.8(a)(2)(ii)). In particular, Regulation T, and related rules, as promulgated and enforced by the Security and Exchange Commission, is not to be taken lightly. Regulation T is designed to prevent “free riding” situations and requires Broker/Dealers to verify funds availability in conjunction with each and every securities trade that they are involved with.
In order to comply with Regulation T for typical industry standard Delivery Versus Payment (DVP) transactions, the Broker/Dealer must follow a pre-determined series of steps. For example, whenever a client desires to conduct a DVP transaction with a Broker/Dealer that doesn't already hold the necessary client assets to consummate the desired transaction in an account at their brokerage firm, the Broker/Dealer is required to request and receive a “Letter of Free Funds” authorization from the custodian Broker/Dealer managing the client account that will be providing the funds for the desired transaction. The Letter of Free Funds authorization is a basically a document certifying whether or not the client has enough funds and securities available in his/her brokerage account at the custodian Broker/Dealer's firm to adequately fund the desired transaction. Except in certain very limited circumstances, without this authorization from the custodian Broker/Dealer, the desired transaction cannot take place.
The process generally used to verify the availability of funds via a Letter of Free Funds authorization is somewhat arcane and inefficient. Typically, the requesting Broker/Dealer will make the request via phone or, alternatively, physically transfer the request via courier or fax to the custodian Broker/Dealer requesting the Letter of Free Funds authorization. Then, after receipt of the request, the custodian Broker/Dealer will review the specified client's account to verify whether or not the necessary funds are available for the desired transaction.
If indeed the necessary funds are available, then the custodian Broker/Dealer will send the appropriate Letter of Free Fund authorization forms back to the requesting Broker/Dealer. If, however, the necessary funds are not available, then the custodian Broker/Dealer will send back a notification to the requesting Broker/Dealer to indicate a lack of funds to complete the desired transaction. These return notification documents are typically transferred via fax or courier. Obviously, this process can be cumbersome and error-prone as well as inefficient.
Although there have been several attempts to alleviate the bottlenecks and difficulties inherent in the currently used Regulation T compliance processes, they have not met with much acceptance in the marketplace. For example, the Depository Trust and Clearing Corporation (DTCC) provides an electronic option for generating Letter of Free Funds to use in standard brokerage transaction. While touted as being “electronic, the DTCC process actually requires custodians to manually verify incoming information and, accordingly, may be prone to the typical human errors associated with review, transcription and data entry. Philosophically, this process may appear to be a step in the right direction, but the manual nature of the process can actually be counter-productive and less efficient than the traditional process. Accordingly, the DTCC system it is not widely accepted. Additionally, the DTCC system and is probably too narrow in application and proprietary in nature to develop a broader base of users.
As shown by the discussion presented herein, the current constraints on data transfer and utilization in the area of financial transactions have throttled desired improvements in the rapidly accelerating pace of doing business. Additionally, mandatory compliance with rapidly evolving, government-mandated rules and regulations will tend to further exacerbate an already inefficient process. As new rules and rulings are adopted, the broker/dealer community must constantly re-evaluate their processes and adjust to meet the new requirements. Accordingly, unless further improvements and enhancements are made in the techniques and methods used to exchange the types of data required in typical brokerage transactions, the flow of information, and by extension money, in typical brokerage transaction systems will remain sub-optimal.